Finding stocks with strong growth prospects is not particularly challenging. After all, the performance of the UK and global economies has been relatively robust in recent months. However, finding stocks which offer a relatively enticing valuation in addition to their high growth rates can be much more difficult. With that in mind, here are two growth stocks. One seems to offer growth at a reasonable price, while the other appears to be overpriced.
Upbeat performance
Recycled packaging supplier DS Smith (LSE: SMDS) released an upbeat update on Thursday. It showed the company is on target to deliver on its previous guidance, with volume growth having been impressive. This has been built on the strength of its relationships with pan-European and e-commerce customers. The integration of recent acquisitions is progressing well, and this could help to bolster the resilient organic growth which the company is expected to offer.
In recent years, DS Smith has focused on improving product differentiation through innovation. This has allowed it to generate a competitive advantage which has led to four consecutive years of double-digit earnings growth. That rate of growth is expected to continue into the 2017 financial year and while the next two years are due to see the company’s growth rate fall to around 5-6% per annum, it remains a solid growth play for the long term.
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Trading on a price-to-earnings growth (PEG) ratio of 1.9, DS Smith seems to offer robust growth at a fair price. Certainly, there may be cheaper growth stocks available, but the company’s sound business model and solid track record of growth show that it potentially offers a lower risk profile than many of its index peers. Given the uncertainty present in global markets at the moment, its risk/reward ratio seems to be favourable.
High valuation
While specialist paper and advanced materials manufacturer James Cropper (LSE: CRPR) also has an upbeat growth outlook, its valuation already seems to take this into account. The company is due to record a rise in its bottom line of 19% in the current year, followed by further growth of 7% next year. However, it trades on a price-to-earnings (P/E) ratio of 29.5, which suggests its share price could come under a degree of pressure after its 42% gain of the last six months.
Even when the company’s rating and growth rate are combined, its PEG ratio suggests now may not be an opportune moment to buy it for the long term. It has a PEG ratio of 2.3 and while the FTSE 100 may be high at the present time, there could be superior growth opportunities on offer elsewhere.
That’s not to say that the company should be completely discounted. Its strategy appears to be performing well following two years of double-digit growth, while it may offer a degree of stability with Brexit around the corner. However, it may be prudent to await a lower share price before buying it.
